The Finnish Property Market 2019 - KTI Kiinteistötieto Oy

The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
The Finnish Property Market | 2019




                                                                                    THE FINNISH PROPERTY MARKET 2019




KTI Finland in co-operation with: City of Helsinki; KIINKO Real Estate Education;
Kojamo; LocalTapiola; Newsec; RAKLI; SATO; SEB Group; Sirius Capital Partners;
Skanska and YIT.
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
The Finnish Property Market | 2019
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
Contents


Preface		                                                                        7

1 The Finnish economy                                                            8
  1.1 The structure of the economy                                               8
  1.2 Outlook for the Finnish economy                                           10
  1.3 Finnish public finances                                                   12
  1.4 Demographics                                                              14
  1.5 Finland’s international competitiveness                                   15
  1.6 Main city regions in Finland                                              17

2 Institutional aspects of the Finnish property market                          19
  2.1 Two forms of property ownership                                           19
  2.2 Market practices of property investment and renting                       20
  2.3 Planning                                                                  22
  2.4 Taxation in Finland                                                       23
  2.5 Legislation for indirect property investment                              27

3 The Finnish property investment market: volumes, structure and players        30
  3.1 Investment market in 2018                                                 30
  3.2 Ownership structure                                                       31
  3.3 Real estate service sector                                                42

4 Property sectors: market structure, practices and investment performance      46
  4.1 The office market                                                         46
  4.2 The retail market                                                         51
  4.3 Rental residential sector                                                 56
  4.4 Public use properties                                                     63
  4.5 Industrial / logistics market                                             65
  4.6 Hotels                                                                    67

5 Property markets in different regions                                         68
  5.1 The Helsinki metropolitan area                                            68
		5.1.1 Helsinki                                                                70
		5.1.2 Espoo                                                                   77
		5.1.3 Vantaa                                                                  79
  5.2 Other growth centres: Tampere, Oulu, Turku, Jyväskylä, Lahti and Kuopio   81

The partners of this publication                                                88
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
Preface
Positive economic development, a stable and transparent business environment and strong performance
of the property market have attracted international and domestic capital to the Finnish property market
in recent years. The past three years have witnessed historically high transaction volumes, and some two
thirds of all transactions have been carried out by international players. Foreign interest is widespread
among all property sectors, and the Helsinki metropolitan area is recognised as one of the most attractive
property investment targets in Europe.

The Finnish Property Market 2019 discusses the structure, players, market practices and conditions in the
Finnish property investment market. The report aims to satisfy the information needs of international
investors and other players interested in the Finnish property market.

This publication is produced in partnership with 11 companies and organisations representing the Finnish
property investment, development, management, finance and advisory sectors. KTI wishes to thank our
sponsors: The City of Helsinki, KIINKO Real Estate Education, Kojamo, LocalTapiola, Newsec, RAKLI,
SATO, SEB Group, Sirius Capital Partners, Skanska and YIT.

The report is published annually in March. The report is also available in PDF format at www.kti.fi.

KTI Finland also publishes an electronic newsletter twice a month. Finnish Property News covers the latest
news from the Finnish property market. To receive this newsletter via e-mail, please subscribe to it at
www.kti.fi.

We hope you find the report interesting, relevant and worthwhile reading.

Hanna Kaleva
KTI Finland




KTI Finland is an independent research organisation and service company providing information and research services for
the Finnish real estate industry. KTI maintains extensive databases on returns, rents, transactions, development projects,
operating costs and customer satisfaction measures in the Finnish property market. Based on these databases, various kinds of
benchmarking and analysis services can be provided. For more information, please call +358 20 7430 130 or visit www.kti.fi.




                                                                                                                                7
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
1 The Finnish economy
                                                                                      1.1 The structure of the economy
                        Basic facts about Finland
                                                                                      Finland is a well-functioning and stable economy, which is
                         GEOGRAPHY
                                                                                      a good example of the benefits of globalization, openness
                                                                                      and a market economy. Strong economic growth, innovation
                         Total area        338,000 square kilometres                  and structural reforms transformed Finland into one of the
                         Distances         1,160 km north to south                    world’s most competitive and prosperous economies during
                                           540 km east to west                        the late 1990’s and early 2000’s.

                         PEOPLE                                                       Growth of industrial production has had a great impact on
                         Population        5.53 million                               the development of the Finnish economy during the past
                                           Density: 18 inhabitants per square         decades. Electrotechnical industries played an important
                                           kilometre                                  role in the growth of the Finnish economy during the first
                                           Helsinki 3,012 per square kilometre        decade of the 2000’s, although its share of the Finnish
                                           Uusimaa region (southern Finland):         exports has declined in recent years. Forestry and paper
                                           170 per square kilometre                   industries are traditionally strong sectors in Finland, as
                                           Lappi region (northern Finland):           well as metal and machinery industries. The importance
                                           2 per square kilometre                     of chemical industries has also increased significantly in
                                                                                      recent years.
                         Languages         Two official languages:
                                           Finnish, spoken by 88.0%
                                                                                      However, during the past years, the share of industrial
                                           Swedish, spoken by 5.2%
                                                                                      production has decreased, while that of services has
                                           Foreign languages spoken by 6.8%
                                                                                      increased. In 2000, industrial production accounted for
                         Capital city      Helsinki, 645,000 inhabitants              30% of the Finnish GDP, and, by 2016, its share had fallen
                                           Helsinki region, 1.5 million inhabitants   to some 20%.
                                           comprising Helsinki and 13
                                           neighbouring municipalities – Espoo
                                           and Vantaa being the biggest
                                                                                             ”Exports account for almost 40
                         Other important   Espoo, 280,000
                         cities            Tampere, 232,000
                                                                                              per cent of the Finnish GDP”
                                           Vantaa, 224,000
                                           Oulu, 202,000
                                           Turku, 190,000                             Services are currently the biggest sector of the Finnish
                                           Jyväskylä, 140,000                         economy, and account for some two thirds of the Finnish
                                           Lahti, 120,000                             GDP. Private services make up some 75 per cent of all
                                           Kuopio, 118,000                            services, the most important sectors being information
                                                                                      and communication, administration and support, trade,
                         ECONOMY
                                                                                      transportation, as well as hospitality services.
                         GDP per capita    €40,618 (2017)
                         Most important    Forest and paper industry products         In 2017, the total industrial production amounted to some
                         exporting         20% of total exports in 2017               €86.5 billion, representing a growth of 11% compared to
                         industries        Chemical industry products 19%             the previous year. The biggest industrial sector was metal
                                           Metal and engineering                      industries, which accounted for some 43% of the total
                                           products 14.9%                             industrial production. The biggest categories within metal
                                           Machinery and equipment 13%                industries include mechanical engineering, electronics and
                                           Electronics and electrotechnical           electrotechnical industry, metals industry and information
                                           goods 11.9%                                technology industries. Chemical and forestry industries
                                                                                      both accounted for approximately 20% of total industrial
                         Currency          Euro (since 2002)
                                                                                      production.
                         History and       Independent democracy since 1917
                         governance                                                   Finland is an export driven economy, and changes in exports
                                           Member of the European Union since         have a profound impact on the economic development. At
                                           1995                                       its highest in 2008, exports accounted for some 45% of
                         Head of State     President of Republic, Sauli Niinistö      the Finnish gross domestic product. In 2017, the exports
1 The Finnish economy




                                           (since 2012, re-elected in 2018)           increased by some 7.5%, and its share of GDP amounted to
                                                                                      38.5% of the GDP. In 2018, the exports of goods increased
                         Parliament        One chamber, 200 members, elected
                                                                                      by some 7%, and the total value increased to €63.8 billion,
                                           for 4 years.
                                                                                      according to the preliminary statistics of the Finnish
                                           Current parliament elected in 2015.
                                                                                      Customs.
                                           Biggest parties: The Center Party
                                           (49 seats), The National Coalition
                                           Party (38), The Social Democratic
                                           Party (35), Blue Reform Parliamentary                   ”Exports contributed
                                           Group (19), The Finns Party (17).                  positively to the growth of the
8                                          New parliament will be elected in                   economy in 2017 and 2018”
                                           April 2019.
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
Finnish economic structure

                                  2017
                                  2016
                                  2015
                                  2010
                                  2005
                                  2000
                                  1995
                                  1990
                                  1985
                                  1980
                                  1975
                                         0      10     20     30       40   50    60         70  100       80            90
                                                                                                    %
                        ■ Primary production ■ Manufacturing ■ Construction ■ Public services ■ Private services
                                                                                                                    Source: Statistics Finland




The diversity of Finnish exports has increased in recent
years. In 2017, metal, machinery and transport equipment                                            ”Services account for 30% of
industries accounted for some 37% of the total exports. The
share of forest industry amounted to 20 per cent, and that of
                                                                                                          the total exports”
chemical industry to 19%. Electric and electronics industry
products accounted for 12% of total exports. In 2018, the
machinery and vehicle industry products were the largest
exports sector with a share of some 21%.                                         Some 60% of the Finnish exports went to the other EU
                                                                                 countries in 2018. The share of Asia amounted to 15%
The share of services of total exports has increased steadily                    and North America to some 8% of the total exports. The
in recent years. In 2017, services accounted for some 30%                        most important target countries of Finnish exports include
of the total exports, and in 2018, the growth in exports of                      Germany (15%), Sweden (10%), the USA (7%), and the
services exceeded that of industrial products. The biggest                       Netherlands (6%). Exports to Germany have increased
exporting sector in services is IT services. Other significant                   significantly in recent years, mainly due to the growth in
exporting service industries include business to business                        exports of cars. The exports to Russia accounted for some
services like research, engineering or marketing services,                       5% of the total exports. At its highest in 2013, Russia’s share
as well as installation and maintenance services related to                      of total goods exports was as high as 18%.
Finnish machinery and equipment deliveries.




Finnish foreign trade by target area                                             Finnish exports by industry sector
        Germany          Sweden          USA                                                   Electric and electronics industry products
        Russia           Netherlands     China                                                 Metal industry products
 %                                                                                             Machinery and transport industry products
16                                                                                             Forest industry products
                                                                                               Chemical industry products
14                                                                                %            Other products
                                                                                 35
12
                                                                                 30
10
                                                                                 25
 8
                                                                                                                                                                                                                           1 The Finnish economy




 6                                                                               20


 4                                                                               15

 2                                                                               10

 0
     1995
     1996
     1997
     1998
     1999
     2000
     2001
     2002
     2003
     2004
     2005
     2006
     2007
     2008
     2009
     2010
     2011
     2012
     2013
     2014
     2015
     2016
     2017
     2018




                                                                                  5
                                                                                      2000
                                                                                             2001
                                                                                                    2002
                                                                                                           2003
                                                                                                                  2004
                                                                                                                         2005
                                                                                                                                2006
                                                                                                                                       2007
                                                                                                                                              2008
                                                                                                                                                     2009
                                                                                                                                                            2010
                                                                                                                                                                   2011
                                                                                                                                                                          2012
                                                                                                                                                                                 2013
                                                                                                                                                                                        2014
                                                                                                                                                                                               2015
                                                                                                                                                                                                      2016
                                                                                                                                                                                                             2017
                                                                                                                                                                                                                    2018




                                             Source: Finnish Customs
                                                                                                                                                                                 Source: Finnish Customs

                                                                                                                                                                                                                                      9
The Finnish Property Market 2019 - KTI Kiinteistötieto Oy
1.2 Outlook for the Finnish economy                               Going forward, the increase in exports is expected to slow
                                                                                          down due to the slowing growth in the global economy as
                        Finnish GDP growth remained sluggish for almost a whole           well as the uncertainty caused by the trade disputes. Also,
                        decade following the global financial crisis. The impacts of      due to the significance of investment goods for the Finnish
                        global economic downturn were boosted by the coinciding           exports, the increased uncertainty in the financial markets
                        collapse of the competitiveness of electrotechnical industries,   deteriorates the outlook. In 2019, the Finnish exports are
                        challenges in the exports to Russia and the increase in labour    forecasted to increase by some 2−3 per cent. Exports will
                        costs, which decreased the international competitiveness          continue to be broadly based with cars, ships, other metal
                        of Finnish exporting industries. Another challenge slowing        industry products and paper and pulp products being the
                        down the economic recovery is Finnish exports’ emphasis           largest product categories. Also the exports of services are
                        on investment goods, where the growth in demand has               expected to develop positively.
                        accelerated more slowly than in consumer goods.
                                                                                          In the coming years, economic growth will be dependent
                        However, in 2016, the Finnish economy took a direction            on the development of consumption instead of exports or
                        towards healthy growth, with GDP growth ending up close           investments. Private consumption is expected to increase
                        to 2.5% in 2016 and 2.8% 2017. The absolute volume of             by some 1−2 per cent both in 2019 and 2020. Consumption
                        production finally reached and exceeded the previous peak         is supported by improving employment and increasing
                        level of 2008 in 2018. Finnish exports were supported by          earnings. A low inflation rate also supports private
                        strengthening competitiveness of the exporting industries,        consumption, as earnings are expected to increase more
                        thanks to more moderate labour cost development than              than consumer prices. Although inflation is expected to
                        that of the key competitive countries, as well as an              increase moderately, it is still forecasted to remain at only
                        increase in productivity. Moderate wage increases in most         around 1.5 per cent in 2019 and 2020. Consumer confidence
                        important exporting industries will continue to support the       has remained strong, especially with regard to households’
                        competitiveness also in 2019.                                     own economic situation. Also low interest rates support the
                                                                                          Finnish households’ economic conditions.
                        In 2018, the Finnish economy continued to grow by some 2.5
                        per cent. Compared to 2017, economic growth was boosted           Active construction has been one of the main drivers of the
                        more by domestic sectors, while the growth of exports slowed      positive economic development in recent years. In 2018,
                        down compared to the previous year. Private consumption           construction investments grew by some 3 per cent compared
                        grew by some 1-1.5 per cent in 2018, and investments by some      to the previous year, while investments in total grew by some
                        3 per cent compared to the previous year.                         3−4 per cent. In 2019, the growth in construction is expected
                                                                                          to come to an end, but no collapse is expected. Construction
                                                                                          investments will be more driven by repair construction, as
                                   ”Finnish economy grew by                               the volumes of new construction are expected to decrease.
                                   some 2.5 per cent in 2018”
1 The Finnish economy




                                                                                                                                                   Photo: YIT




10
GDP growth in Finland and in the Euro area
                                           %               Finland                Euro area (19 countries)
                                           8

                                           6

                                           4

                                           2

                                           0

                                           -2

                                           -4

                                           -6

                                           -8

                                          -10
                                                  1990
                                                  1991
                                                  1992
                                                  1993
                                                  1994
                                                  1995
                                                  1996
                                                  1997
                                                  1998
                                                  1999
                                                  2000
                                                  2001
                                                  2002
                                                  2003
                                                  2004
                                                  2005
                                                  2006
                                                  2007
                                                  2008
                                                  2009
                                                  2010
                                                  2011
                                                  2012
                                                  2013
                                                  2014
                                                  2015
                                                  2016
                                                  2017
                                                2018**
                                                2019**
                                                2020**
                                                                                                                                                                 **Forecast


                                                                                     Source: Eurostat, countryeconomy.com, OECD, IMF, Ministry of Finance




                                                                                                                            Thanks to the strengthening economy, unemployment
        ”New construction volumes are                                                                                       has decreased in recent years. At the end of 2018, the
            expected to decrease”                                                                                           unemployment rate stood at some 7.4%, and it is expected
                                                                                                                            to decrease well below 7% in 2019. However, due to the
                                                                                                                            slowing economic growth, as well as the increasing structural
In other investment sectors, moderate growth is expected                                                                    challenges in matching demand and supply for the workforce
to continue in 2019. However, due to increased global                                                                       makes a rapid decrease in unemployment unlikely. In some
uncertainty, forecasts on the development of investments                                                                    industries, the lack of a skilled workforce is already causing
in machinery and equipment, as well as in research and                                                                      challenges, which is likely to result as increasing wages,
development vary significantly. In most positive forecasts                                                                  which, in turn, will deteriorate the cost competitiveness of
total investments are expected to increase by some 3−4 per                                                                  the Finnish industries.
cent in 2019, but in others, the growth is expected to be
only some 1 per cent.

Going forward, the Finnish economy is expected to grow                                                                                      ”Employment rate exceeded
by a stable but slowing pace. The growth will be based on a
continuous but slowing increase in consumption, exports and
                                                                                                                                               72 per cent in 2018”
investments. For 2019 GDP growth forecasts vary between
1.5 and 2 per cent, and for 2020, between 1 and 1.5 per cent.




                    GDP in 2010 prices and GDP growth​
                                          EUR million                     GDP in 2010 prices                    GDP growth                                                                         %
                                          240,000                                                                                                                                                  8

                                          220,000                                                                                                                                                  6

                                          200,000                                                                                                                                                  4
                     GDP in 2010 prices




                                          180,000                                                                                                                                                  2
                                                                                                                                                                                                        GDP growth




                                          160,000                                                                                                                                                  0

                                          140,000                                                                                                                                                  -2
                                                                                                                                                                                                                     1 The Finnish economy




                                          120,000                                                                                                                                                  -4

                                          100,000                                                                                                                                                  -6

                                           80,000                                                                                                                                                  -8

                                           60,000                                                                                                                                                  -10
                                                                                                                                                                                 2019**

                                                                                                                                                                                          2021**
                                                                                                                                                                       2017*
                                                    1985

                                                            1987

                                                                   1989

                                                                           1991

                                                                                  1993

                                                                                         1995

                                                                                                1997

                                                                                                       1999

                                                                                                              2001

                                                                                                                     2003

                                                                                                                             2005

                                                                                                                                    2007

                                                                                                                                           2009

                                                                                                                                                  2011

                                                                                                                                                         2013

                                                                                                                                                                2015




                                                                                                                                                         *Preliminary          **Forecast


                                                                                                                                Source: Statistics Finland, Ministry of Finance                                      11
The current government’s objective to increase employment                                                                          1.3 Finnish public finances
                        rate to over 72 per cent was reached in late 2018, and it is
                        expected to continue improving in the coming years. Due                                                                            Thanks to the strengthening economy, Finnish public
                        to the ageing population, a high employment rate is crucial                                                                        finances also improved in 2018. The general government
                        to the Finnish welfare society, and it is generally agreed that                                                                    in Finland consists of the central government, local
                        the employment rate should increase further. This is likely to                                                                     government, and social security funds. Of these, central and
                        arise discussion about the needed changes in social security                                                                       local government finances are cyclical and dependent on the
                        benefits in order to boost employment.                                                                                             fluctuating tax revenues, whereas social security funds are
                                                                                                                                                           pension related, and receive more consistent revenue from
                                                                                                                                                           both pension payments and investment income.


                                                 Consumer confidence indicator​

                                                                                          Finland                 Euro area (19 countries)
                                                                 15

                                                                 10

                                                                              5

                                                                              0

                                                                         -5

                                                             -10

                                                             -15

                                                             -20

                                                             -25
                                                                                   2000

                                                                                           2001

                                                                                                  2002

                                                                                                         2003

                                                                                                                2004

                                                                                                                       2005

                                                                                                                              2006

                                                                                                                                     2007

                                                                                                                                            2008

                                                                                                                                                   2009

                                                                                                                                                          2010

                                                                                                                                                                 2011

                                                                                                                                                                        2012

                                                                                                                                                                               2013

                                                                                                                                                                                      2014

                                                                                                                                                                                              2015

                                                                                                                                                                                                     2016

                                                                                                                                                                                                            2017

                                                                                                                                                                                                                   2018

                                                                                                                                                                                                                          2019
                                                                                                                                                                                  Source: European Commission




                                                 Employment and unemployment in Finland
                                                                                                    Employed                    Unemployed

                                                                                  2,800                                                                                                                            450

                                                                                  2,700                                                                                                                            400
                                                                                                                                                                                                                             Unemployed, 1,000 persons




                                                                                  2,600                                                                                                                            350
                                                    Employed, 1,000 persons




                                                                                  2,500                                                                                                                            300

                                                                                  2,400                                                                                                                            250

                                                                                  2,300                                                                                                                            200

                                                                                  2,200                                                                                                                            150

                                                                                  2,100                                                                                                                            100

                                                                                  2,000                                                                                                                            50

                                                                                  1,900                                                                                                                            0
                                                                                            1988
                                                                                            1989
                                                                                            1990
                                                                                            1991
                                                                                            1992
                                                                                            1993
                                                                                            1994
                                                                                            1995
                                                                                            1996
                                                                                            1997
                                                                                            1998
                                                                                            1999
                                                                                            2000
                                                                                            2001
                                                                                            2002
                                                                                            2003
                                                                                            2004
                                                                                            2005
                                                                                            2006
                                                                                            2007
                                                                                            2008
                                                                                            2009
                                                                                            2010
                                                                                            2011
                                                                                            2012
                                                                                            2013
                                                                                            2014
                                                                                            2015
                                                                                            2016
                                                                                            2017
                                                                                            2018




                                                                                                                                                                                         Source: Statistics Finland




                        Key figures – Finnish economy
1 The Finnish economy




                                                                                          2012                  2013                 2014                 2015                 2016                  2017                 2018                           2019**   2020**
                        GDP (change in vol), %                                            -1.4                  -0.8                 -0.6                 0.5                  2.8*                  2.7*                 2.8**                           1.5      1.3
                        Change in exports, %                                              1.2                   1.1                  -2.7                 0.8                  3.5*                  7.7*                 3.5**                           3.1      2.6
                        Inflation, %                                                      2.8                   1.5                  1.0                  -0.2                  0.4                   0.7                   1.1                           1.4      1.6
                        Unemployment rate, %                                              7.7                   8.2                  8.7                  9.4                   8.8                   8.6                   7.4                           6.9      6.7
                        Private consumption, %                                            0.3                   -0.5                 0.6                  1.7                   2.0                   1.3                 2.1**                           1.6      1.4

                        *Estimate **Forecast                                                                                                                                                 Source: Statistics Finland, Ministry of Finance, Nordea
12
Photo: Unrealer / Kojamo
Finland’s general government finances have remained on                   Finnish public finances continue to face challenges, and
deficit ever since the global financial crisis. In 2018, public          strengthening the public economy requires some structural
finances still remained negative, but the deficit decreased              reforms. The Finnish social welfare society is largely based
to some 0.8 of the GDP. Although the deficit is expected to              on a comprehensive supply of public services, including, for
continue decreasing in the coming years, general government              instance, free education and healthcare, social support for
budgets are likely to remain slightly negative.                          families in the forms of child allowances for all families and
                                                                         municipal day-care provision, which is widely used in all
Due to the negative annual budgets, the absolute amount                  income categories. Extensive public responsibility and tax
of general government debt has increased in recent years.                funding are the cornerstones of the Finnish social welfare
However, thanks to the economic growth, the relative share               society. As a result, government expenditure currently
of general government debt of the GDP decreased even                     accounts for some 53% of total production. Public spending
faster than anticipated, and fell below the 60% threshold                will be increased as the ageing of the population increases
in 2018. The debt rate is expected to continue decreasing                pension payments as well as social service and healthcare
also in the coming years.                                                expenses.

                                                                         Funding of the welfare society is largely based on a high level
         ”General government debt                                        of taxation. The current government has been determined
                                                                         to decrease the income tax rate, partly in order to enable
          decreased in 2018 due to                                       moderate wage increases in the labour markets and to
        enhancing economic growth”                                       support the international competitiveness of the exporting
                                                                         industries. Despite a slight decrease in recent years, the tax


               Main components of demand,                         Volume index 1990=100, seasonally adjusted

                                            Exports   Total demand   Consumption   Investment

                           500



                           400



                           300
                                                                                                                                                               1 The Finnish economy




                           200



                           100



                             0
                                 1990
                                 1991
                                 1992
                                 1993
                                 1994
                                 1995
                                 1996
                                 1997
                                 1998
                                 1999
                                 2000
                                 2001
                                 2002
                                 2003
                                 2004
                                 2005
                                 2006
                                 2007
                                 2008
                                 2009
                                 2010
                                 2011
                                 2012
                                 2013
                                 2014
                                 2015
                                 2016
                                 2017
                                 2018




                                                                                       Source: Statistics Finland
                                                                                                                                                               13
rate in Finland is among the highest in the OECD countries,         One of the most discussed topics around the reform is the
                        and stood at over 42% of GDP in 2018. In 2017, the Finnish          freedom of choice for citizens between public and private
                        tax rate stood at 43.3%, and was only exceeded by France,           service providers. This has also been one of the main reasons
                        Denmark, Belgium and Sweden.                                        for the delay of the reform. According to the current plan,
                                                                                            the clients’ freedom of choice will come into force in 2023.
                        Finnish municipalities currently have a significant role in
                        public services. In the Finnish system, the central government      The planned reform has already significantly increased
                        sets the framework and basic principles of social welfare and       the supply of private sector healthcare services, and many
                        monitors their implementation, whereas most of the actual           municipalities have privatised the supply of services either
                        provision of social welfare is carried out at the local level, in   partially or fully. The private sector currently accounts for
                        municipalities. Municipalities are responsible for the majority     some 17% of healthcare and social services, and its share is
                        of, for instance, education, healthcare and social services.        expected to increase to some 25% within the next couple
                                                                                            of years.
                        There are currently 311 municipalities in Finland.
                        Municipalities differ from each other significantly with
                        regard to their size, economic structure and financial                        ”The reform of social and
                        position. The smallest municipalities are typically currently
                        facing the biggest economic challenges due to a negative
                                                                                                     healthcare services will have
                        migration balance and an ageing population, which increases                  a major impact on property
                        the cost burden in healthcare services. Therefore, structural                        investment”
                        reforms in the municipalities’ responsibilities are essential
                        in ensuring the sustainability of Finnish public finances.
                                                                                            The reform will also impact the ownership and financing
                                                                                            of public healthcare properties, and more opportunities
                                   ”There are more than 300                                 for property investors will be opened up. Most of these
                                                                                            properties are currently owned by the Finnish municipalities
                                    municipalities in Finland”                              or municipal federations. The attractiveness of private sector
                                                                                            care property investment has increased markedly in recent
                                                                                            years, and several new investment companies and funds
                        One of the most significant reforms in the current                  specialised in this sector have been established. These
                        government’s agenda is the restructuring of the management          companies and funds most often rent the premises for private
                        and provision of social and healthcare services. The                sector service providers.
                        reform also includes profound development of the regional
                        government structure. The organisation of healthcare                A separate company, Maakuntien Tilakeskus Oy, has been
                        and social services is planned to be transferred from               established to own and manage the buildings needed for the
                        municipalities to 18 self-governing counties. The reform            services affected by the regional reform. The ownership of
                        is one of the biggest ever administrative restructurings in         the properties currently owned by municipal federations,
                        Finnish history. In addition to healthcare and social services,     comprising mainly large central hospitals, has already been
                        the new counties will be responsible for, for instance, rescue      transferred to Maakuntien Tilakeskus. The company will
                        services, environmental issues, regional development duties         also manage all lease agreements of the properties that
                        and tasks related to the promotion of business enterprise as        municipalities have rented from private landlords.
                        well as planning and steering of the use of regions.
                                                                                            When the regional reform comes into force, counties will
                        The reform has been delayed several times due to various            rent all the properties currently owned and operated by
                        political and constitutional law challenges in legislative          the municipalities for a transition period of three years.
                        processes. The reform is currently planned to come into             Maakuntien Tilakeskus Oy will also manage all these
                        force in several phases starting from the beginning of 2021.        lease agreements and premises. According to the current
                        This schedule is dependent on the Parliament’s ability to           estimates, the company will manage some 18,000 rental
                        accept the legislation before the current term ends in mid-         agreements and 10.5 million sqm of premises with a total
                        March. If the legislation will be accepted, the first regional      worth of some €3.5 billion.
                        government election should be organized in late 2019.
                                                                                            After the transition period, the counties will define the
                                                                                            premises needed for their service provision in the longer
                                  ”The schedule of the reform                               term. It is expected that some portion of the current
                                                                                            properties would be left vacant after the transition period.
                                  in regional government still                              However, the amount of excess space and its impact on the
1 The Finnish economy




                                         not confirmed”                                     municipalities’ finances has yet to be defined.


                        The main objective of the healthcare and social services            1.4 Demographics
                        reform is improved control over the increasing costs of
                        services. Productivity of the services is expected to increase      Finland is an ethnically homogeneous country, where most
                        through centralised management, increased competition, as           of the population is ethnically Finnish. Even though the share
                        well as digitalisation and improved information systems for         of foreigners of the population has increased in recent years,
                        healthcare service providers.                                       it is still among the lowest within the EU.
14
The Finnish population by age group                                   The Finnish households by size
2014-2065
         0-17             18-29           30-64
         65-79            80-                                                      1 person                    2 persons              3+ persons
 %                                                                      %
 50                                                                    60


                                                                       50
 40

                                                                       40
 30
                                                                       30
 20
                                                                       20

 10
                                                                       10


  0                                                                     0
      2014
      2016
      2018
      2020
      2022
      2024
      2026
      2028
      2030
      2032
      2034
      2036
      2038
      2040
      2042
      2044
      2046
      2048
      2050
      2052
      2054
      2056
      2058
      2060
      2062
      2064




                                                                            1985

                                                                                   1990

                                                                                          1995

                                                                                                 2000

                                                                                                        2005

                                                                                                               2010

                                                                                                                      2011

                                                                                                                             2012

                                                                                                                                    2013

                                                                                                                                           2014

                                                                                                                                                  2015

                                                                                                                                                         2016

                                                                                                                                                                2017
                                         Source: Statistics Finland
                                                                                                                                       Source: Statistics Finland



The population of Finland is currently around 5.6 million.            The long-term credit ratings for Finland remain strong.
Within the past decade, the population has increased by               Standard & Poor’s, Moody’s and also Fitch have all rated
some 0.3-0.4 per cent annually. Population growth is a result         Finland in the second best category, at AA+ / AA1. Standard
of immigration, as the number of deaths currently exceeds             & Poor’s and Moody’s consider the outlook as “stable”,
that of births. Fertility has decreased in recent years, and the      whereas Fitch improved the outlook as “positive” in late 2018.
average fertility rate currently stands at only 1.4. According        Finland’s strong institutions and highly skilled workforce
to the current forecasts, the Finnish population is expected to       are appreciated by the rating agencies. On the other hand,
increase until 2035, after which the population will decrease,        the deficit and increasing indebtedness of public finances
and, by 2050, the total population would decrease under               have caused ratings to deteriorate in recent years, and the
the current number.                                                   agencies recommend structural reforms in order to address
                                                                      the challenges caused by the ageing of the population. In
Life expectancy is currently 84 years for women and 78 years          current conditions, the Finnish government continues to be
for men, which is the 31st highest in the world.                      able to acquire funding at a very low cost.

Ageing of the population is currently one of the biggest
challenges of the Finnish economy. The largest age groups                                 ”Finland’s credit ratings
were born after the Second World War, and between
1945−1950 almost or even more than 100,000 babies were
                                                                                               remain strong”
born each year. In 2018, there were only 47,300 births. The
baby boom generations are now retired, which increases the
total dependency ratio, that is, the total number of people           In the World Economic Forum’s Global Competitiveness Report,
under 15 and over 65 in relation to working age population.           published in October 2018, Finland was ranked in the 11th
The total dependency ratio is currently almost 60, and is             position, right after Sweden and Denmark, among the 140
expected to increase to 62 by 2020 and to 66 by 2030.                 evaluated countries.

The share of those over 65 years of the total population              In the ranking, Finland ranks high with regard to the
currently stands at some 22%. By 2030, their share is                 functioning of its institutional framework, as well as its
expected to increase to some 26%.                                     macroeconomic stability. Within this pillar, the strengths of
                                                                      Finland are mostly related to the legal framework and judicial
The average size of a Finnish household has been constantly           system. Finland is also highly appreciated for the high
decreasing. In 2017, some 75% of Finnish households                   quality education and training systems. The development
consisted of one or two persons, and the average size of              of the financial market, as well as business dynamism and
households is 2.01 persons. In the largest cities, households         innovation capacity are other strengths of Finland in this
                                                                                                                                                                       1 The Finnish economy




are typically smaller, and in Helsinki, the share of single-          assessment. Of the assessed pillars, Finland performs worst
person households is currently 48%.                                   with regard to market size and infrastructure. Restrictive
                                                                      labor regulation was also identified as one problematic factor
                                                                      for doing business.
1.5 Finland’s international
competitiveness                                                       In IMD’s World Competitiveness Ranking of 2018, Finland was
                                                                      assessed at the 16th position (15th place in 2017). In this
Finland retains its good position in many international rankings      ranking, Denmark (7th), Norway (8th) and Sweden (9th), all
that look at various indicators regarding the competitiveness         continued to outperform Finland.
of the economy as well as the overall welfare of citizens.                                                                                                             15
The most competitive national economies in 2018
                                                                                                   Global Competitiveness Index 4.0
                                                                                                                       0-100 (best)
                                              United States
                                                 Singapore
                                                  Germany
                                                Switzerland
                                                     Japan
                                           The Netherlands
                                                 Hong Kong
                                            United Kingdom
                                                   Sweden
                                                  Denmark
                                                    Finland
                                                              80     81       82        83   84        85         86

                                                                                                       Source: World Economic Forum




                        In a recent Good Country Index, which measures the                   variables supporting the citizens’ well-being include income,
                        contribution of a country to the greater good of humanity,           healthy life expectancy, social support, freedom, trust and
                        Finland was ranked first among 153 countries. In this                generosity. Finland also ranks well in comparisons assessing
                        comparison, Finland performs best in the areas of prosperity         gender equality and social coherence.
                        and equality, planet and climate, as well as in world order,
                        where it is assessed to contribute a lot in relation to its size.    In OECD’s Better Life Index 2018, Finland was ranked
                                                                                             ninth. In this comparison, the strengths of Finland include,
                                                                                             for example, the quality and accessibility of the education
                                  ”Finland is one of the most                                system, environmental quality, safety and the overall life
                                                                                             satisfaction of citizens.
                                 competitive economies in the
                                             world”                                          Among global capitals, Helsinki typically performs well
                                                                                             with regard to its business environment as well as living
                                                                                             conditions. It is considered as one of the safest, most equal,
                        Finland is widely recognised as one of the least corrupt             and honest cities, where it is easy to move and which has
                        countries in the world. In Transparency International’s Global       the most content inhabitants among the European capitals.
                        Corruption Perceptions Index for 2018, Finland retained third        Helsinki also attracts start-up companies and talent, due to
                        place among 180 countries. In this ranking, Finland was              its high level of technology and innovation, and having a
                        only outperformed by Denmark and New Zealand. The                    good environment for entrepreneurship. For instance, The
                        report identified strong access to information systems and           Financial Times ranks Helsinki 6th in its ranking of “Global
                        transparency of institutions as the factors differentiating          cities of the future”, where the cities’ ability to attract global
                        the winners from other countries. In The Fund for Peace’s            innovation capital is assessed. In INSEAD’s ranking of cities’
                        Fragile State Index 2018, Finland retained its position as the       ability to attract and retain talented workforce (The Global
                        most stable country in the world.                                    City Talent Competitiveness Index GTCI), Helsinki was
                                                                                             ranked 3rd among 46 cities.
                        In its Travel and Tourism Competitiveness Report, World Economic
                        Forum assesses Finland as the safest country in the world,           These rankings illustrate Finland’s reputation as a respected
                        which also has, according to the Global Competitiveness              Nordic welfare economy where political and economical
                        Report, the least organised crime. Finland’s security and            stability, transparent regulatory framework and high-quality
                        safety are also appreciated, for instance, by the World Justice      education and healthcare support business and living. The
                        Project, World Internal Security and Police Index, as well as Law    not-so-positive characteristics of Finland, from a business
                        and Order Index.                                                     perspective in particular, mostly deal with the small size of
                                                                                             the market. High tax rates and restrictive labour regulations
                                                                                             are commonly regarded as the main weaknesses of Finland.
                                     ”Finland remains one of
                                   the least corrupt and safest
1 The Finnish economy




                                     countries in the world”                                          ”One of the most transparent
                                                                                                        property markets in the
                                                                                                                 world”
                        Finland, together with other Nordic countries, typically
                        performs well in international rankings assessing quality of
                        living. Sustainable Development Solutions Network ranked             The overall business environment is also reflected in the
                        Finland as the happiest country in the world in its World            comparisons conducted in the property markets. The Finnish
                        Happiness Report in 2018. In this comparison, the key assessed       property market is regarded as one of the most transparent
16
Main city regions ​in Finland




                                                                                                 Additions to the map by
                                                                                                 KTI.​ OpenStreetMap
                                                                                                 Finland web services
                                                                                                 Map: Ministry of
                                                                                                 Education and Culture.
                                                                                                 Data: OpenStreetMap
                                                                                                 contributors.​ Statistics
                                                                                                 Finland Open data.​
                                                                                                 Licensed under CC BY 4.0.




in the world. JLL’s Global Real Estate Transparency Index           Currently, there are four city regions with more than 250,000
of 2018 ranked Finland among the few “highly transparent”           inhabitants: Helsinki, Tampere, Turku and Oulu. These
European markets.                                                   regions generally perform well and show strong economic
                                                                    development and population growth. The second tier of city
                                                                    regions – those with more than 100,000 inhabitants – include
            ”Helsinki was ranked 8th                                7 regions: Lahti, Jyväskylä, Kuopio, Pori, Seinäjoki, Joensuu,
                                                                    and Vaasa. City regions with a population of 80,000-90,000
           among the most attractive                                include Hämeenlinna, Kouvola, Lappeenranta and Kotka-
          property markets in Europe”                               Hamina. There are significant differences in the economic
                                                                    performance and growth between these city regions.

In Pricewaterhouse Cooper’s and Urban Land Institute’s report       Population growth has and is expected to be fastest in the
Emerging Trends in Real Estate Europe 2019, Helsinki improved its   Helsinki region, which currently accommodates some 1.5
position, markedly leaping 10 positions to be ranked 8th among      million inhabitants. The region comprises 14 municipalities,
European cities. The prospects for both investment (rank 4) and     and the main cities in the region include Helsinki, Espoo and
development (rank 13) were assessed as “good”. The position         Vantaa, which, together with the smaller city of Kauniainen,
of Helsinki is strengthened, among other things, by the strong      form the Helsinki metropolitan area. In recent years, the
performance of the economy, as well as by the rapid population      population of the Helsinki region has been increasing by
growth in the metropolitan area.                                    almost 20,000 inhabitants per annum, with net migration
                                                                    from both other parts of Finland and from abroad being
                                                                    the main driver for the growth. By 2050, the population
1.6 Main city regions in Finland                                    is forecasted to increase to 1.8−1.9 million. The Helsinki
                                                                    region currently represents some 27% of Finland’s total
Urbanisation has proceeded fast in Finland in recent years.         population, 37% of the country’s total GDP and 32% of
In 1990, some 60% of the Finnish population lived in urban          all jobs, even as the land area represents only 1.2% of the
                                                                                                                                     1 The Finnish economy




areas, and by 2017, the share has increased to some 70%.            whole country.
The 14 biggest city areas currently represent some 74% of
the Finnish GDP and 72% of all jobs.                                Outside the Helsinki region, growth is expected to be the
                                                                    strongest in the Oulu region, whose population is expected
Urbanisation has been and will be a result of both internal         to grow by almost 20% – 40,000 people – between 2017 and
migration and immigration. Within Finland, moves are                2040. In the same period, the Tampere region is expected
weighted towards the young or working-age population,               to grow by some 15% and the Turku region by some 10%.
which increases the challenges for, for instance, maintenance
of public service provision in regions suffering from negative      The 21 largest cities in Finland have recently formed a co-
migration.                                                          operation platform, the so called C21 group. The group           17
Significance of 21 biggest city regions in Finland, % of total
                                                                                Helsinki region                The regions of Tampere,                21 biggest city regions
                                                                                                                   Turku and Oulu
                         Population (2017)                                            27.9                                    17.8                                  77.5
                         Jobs (2017)                                                 31.2                                     18.1                                  78.7
                         Private-sector jobs (2015)                                  35.2                                     18.3                                  81.9
                         GDP (2016)                                                  40.0                                     17.2                                  82.5
                         Research and development expenditure (2017)                 48.3                                     28.7                                  94.9
                         Completed dwellings (2010-2018)                              29.7                                    21.7                                  82.5

                                                                                                                                                            Source: Statistics Finland


                        consists of all regional centres across Finland, and all cities           weighted towards the largest cities. The Helsinki region
                        with more than 50,000 inhabitants. These cities comprise                  alone would represent almost half of the increase.
                        some 75% of the Finnish population, 78% of jobs and some
                        88% of value added.                                                       Residential construction has been booming in recent years,
                                                                                                  especially in the largest cities. In both 2017 and 2018,
                                                                                                  residential construction starts amounted to some 40,000
                                ”Helsinki, Tampere and Turku                                      dwellings, which represents a significant growth compared
                                                                                                  to the previous years, and is almost twice as much as in 2014.
                                 regions make up the ’growth
                                     triangle’ of Finland”
                                                                                                                ”Demand for rented housing
                        The so called “growth triangle” – the city regions of Helsinki,
                                                                                                                  increases in main cities”
                        Tampere and Turku – is an important and growing area in
                        southern Finland. It currently accommodates 49 per cent
                        of the population and 53 per cent of all private sector jobs,             Some two thirds of new housing construction is concentrated
                        and accounts for 55.5 per cent of the total GDP. It is also               in main city regions. In the Helsinki metropolitan area, some
                        an increasingly connected employment area for 1.5 million                 14,500 new dwellings were started in 2017, and in 2018, the
                        people, where well-functioning public transport has an                    volumes were even higher.
                        important role in connectivity and economic development.
                        Therefore, the development of rail connections between these              The growth in construction has been strongest in small
                        cities are currently discussed actively, and the planning of              apartments in apartment buildings. New development is
                        the so called “hour’s train” connection between Helsinki and              boosted by strong investment demand, which will result
                        Turku has been started by the current government. Also the                as increased supply of private rental housing in the main
                        development of the main rail line northward of Helsinki is on             cities. At the end of 2018, almost 9,000 new dwellings were
                        the agenda of both the current government and the largest                 under construction in buildings targeted 100% for rental
                        cities. In late 2018, project companies for boosting these                use in Helsinki metropolitan area.
                        projects were founded by the state, with the aim of committing
                        both the largest cities and private investors in the development
                        of the rail infrastructure. The aim is to include these projects
                        in the next 12 years’ investment budget.
                                                                                                  Housing construction in main city
                        Residential demand in main city regions                                   regions 2009–2018
                        Increasing urbanisation, demographic development and
                        changes in housing preferences have a profound impact on
                        housing markets in Finland. The demand for small, well-                                         ■ Helsinki ■ Tampere ■ Turku ■ Oulu
                                                                                                                        ■ Kuopio ■ Jyväskylä ■ Lahti
                        located apartments has increased both in owner-occupied                    dwellings
                        and rental housing markets, whereas the need for single-                  35,000

                        family houses and large apartments has decreased. In recent
                                                                                                  30,000
                        years, the vast majority – as much as 90% of new housing
                        construction – has been concentrated in main city regions.
                                                                                                  25,000

                        In its study on residential demand by 2040, published in
1 The Finnish economy




                                                                                                  20,000
                        2015, the VTT Technical Research Centre of Finland based
                        its forecasts on two different scenarios. In both scenarios,              15,000
                                                                                                               1.6
                        the Finnish population is estimated to grow to 5.8 million
                        by 2040. In the “conservative” scenario, population growth                10,000
                        estimates are based on current regional structure. In the
                        “urbanisation” scenario, migration to 14 main city regions                 5,000
                        is estimated to accelerate, resulting in an increase of some
                        625,000 inhabitants by 2040. In these regions, almost                           0
                                                                                                                2009

                                                                                                                       2010

                                                                                                                                2011

                                                                                                                                       2012

                                                                                                                                              2013

                                                                                                                                                     2014

                                                                                                                                                             2015

                                                                                                                                                                    2016

                                                                                                                                                                           2017

                                                                                                                                                                                  2018




                        29,000 new dwellings would be needed annually. In this
18                      scenario, the increase in residential demand would be heavily                                                                           Source: Statistics Finland
2 Institutional aspects
of the Finnish property
market
2.1 Two forms of property ownership                             legislation for limited companies as the regulatory framework
                                                                for the company. The Act regulates, for instance, long-term
In juridical terms, owning property in Finland means owning     planning of repairs and the communication of these plans
the land and the buildings on it. This is the basic form of     to shareholders, as well decision-making procedures and
direct property ownership. It is also possible to own only      responsibilities of shareholders.
the building and have a long-term lease agreement with the
landowner, typically the municipality. Direct ownership and     In mutual real estate companies, rental agreements are made
land lease agreements are registered with the Land Register     between the shareholder and tenant, and the rental cash flow
maintained by regional District Survey Offices.                 goes directly to the shareholder. Shareholders can use their
                                                                shares in the company as collateral for loans.
Transactions with real property are official legal acts that
have to be carried out according to a specific procedure.       The mutual real estate or housing company is responsible
These transactions are public in nature and are registered      for the management of the property and upkeep of joint
and published by the National Land Survey of Finland.           facilities, for which it collects a maintenance fee from the
                                                                shareholders. This fee is most typically based on the floor
In practice, it is very common for property ownership to        area designated for each shareholder.
be organised through a limited company (a real estate/
housing company) founded for the sole purpose of owning         The company itself can also take out a loan, for example,
the property. In these cases, the legal owner of the real       for renovation and modernisation, and use the building and
estate is the limited company, which may have one or several    real estate as collateral. In these cases, the shareholders pay
shareholders. The shares may be connected to a specific         a finance charge to the mutual company, which then covers
apartment/amount of space on the property, entitling the        the loan to the original lender.
shareholder to physical control and occupancy of these
premises. These types of companies are called mutual real       The other type of real estate company is a standard limited
estate companies (“MREC”s; keskinäinen kiinteistöyhtiö). This   company (kiinteistöosakeyhtiö), founded for the purpose of
form of ownership is commonly used in both residential and      owning a certain property or properties. In these companies,
commercial properties.                                          the shares are not connected to any specific premises.
                                                                Rental agreements are made between the tenant and the
The Housing Companies Act and Decree regulates mutual           company, and the company is responsible for maintenance
real estate companies that operate in the housing sector        and operating costs, which it covers with the rental income.
(asunto-osakeyhtiö). These regulations are always applied       The real estate company can pay out dividends to its
when more than 50% of the area of the building is designated    shareholders.
for residential use. When establishing a mutual real estate
company for commercial property, shareholders can choose
either to apply the Housing Companies Act or the normal

                                                                                                                                           2 Institutional aspects of the Finnish property market
                                                                                                                          Photo: Skanska




                                                                                                                                           19
Impact on market practices                                        selling real estate, but as real estate transactions are subject
                                                         Owning property through a mutual real estate company is a         to certain provisions, it is advisable to use real estate brokers
                                                         more flexible form of ownership, for example in cases where       or lawyers when entering into property transactions.
                                                         the ownership of a building is divided among several owners.
                                                         The transfer tax rate is also lower: 2% on the shares of the      Transactions with housing or real estate company shares are
                                                         limited company versus 4% on direct property. Transactions        straightforward and simple. As soon as transfer taxes have
                                                         are also less complicated compared to direct ownership of         been settled, the purchaser can be registered as the owner
                                                         real estate.                                                      of the shares in the company’s registers.

                                                         The decision-making and management procedures of a                Finnish legislation regulating rental agreements is among
                                                         mutual real estate company are defined in the company’s           the most liberal in the world and is based on the idea of
                                                         articles, which have to fulfil certain requirements set by        full freedom of agreement between two parties. There are
                                                         law. An individual owner’s degree of control depends on           no minimum or maximum lease terms, indexation is not
                                                         their share of ownership, unless otherwise agreed in the          regulated, there are no automatic rights for renewal, and
                                                         company by-laws.                                                  break clauses are possible if agreed. Only in the residential
                                                                                                                           market do some restrictions exist to protect the tenant, but
                                                         Due to its flexibility and transparency, the mutual real          even there, the legislation has very few restrictions compared
                                                         estate company is a common way to organise the ownership          with most other countries.
                                                         and management of property. In practice, the majority of
                                                         commercial property transactions in the Finnish market are
                                                         made by transacting the shares of real estate companies.          2.2 Market practices of property
                                                         These transactions are not public by law.                         investment and renting
                                                                                                                           Property investment
                                                                   ”A new digital share register                           Developments over the last decade in the Finnish property
                                                                                                                           market – which includes the emergence of new players,
                                                                      for MREC shares was                                  increased internationalisation, professionalism and more
                                                                       established in 2019”                                sophisticated analysis – have resulted in new practices in
                                                                                                                           property investment processes. This has also increased the
                                                                                                                           demand for specialist services in property transactions.
                                                         In the beginning of 2019, new legislation concerning digital
                                                         share register for mutual real estate companies came into         The ways transaction processes are carried out partly
                                                         force. From now on, all shares of new mutual real estate          depend on the market situation. In recent years, high
                                                         companies will be only in digital form, and registered in a       investment demand has encouraged sellers to carry out
                                                         newly established share register maintained by the National       extensive auction processes in order to find the best
                                                         Land Survey. Shares of old mutual real estate companies will      solution. In quieter market conditions, tailored approaches
                                                         be transferred to this digital register starting from May 2019.   to identify the potential buyer are more common. Off market
                                                         In the future, both the ownership and all transfers of shares     procedures are also applied when the seller aims at a faster
                                                         will be registered in this electronic register and physical       and smoother transaction process.
                                                         share certificates will no longer be needed.
                                                                                                                           The role of the advisor or property agent in the investment
                                                         Legislation concerning renting and                                process varies depending on the situation, characteristics of
                                                         transactions                                                      the asset and type of companies involved. In large portfolio
                                                         Generally speaking, the Finnish legal system is simple and        transactions, the parties typically use extensive advisory and
2 Institutional aspects of the Finnish property market




                                                         liberal. In principle, there are no restrictions on buying or     corporate finance expertise, and implement thorough due
                                                                                                                                                                                        Photo: Kojamo




20
Distribution of office lease                                                           In KTI’s rental database, measured by the number of
agreements in the Helsinki                                                             agreements, some 50% of all office agreements in the
metropolitan area, sqm                                                                 Helsinki metropolitan area are indefinite. Another 25%
                                                                                       of the agreements first have a fixed term of, for example,
                                                                                       3 or 5 years, after which they continue automatically for
                                                                                       an indefinite period – until further notice from either of
        42%                     34%                                                    the parties. Indefinite lease periods are typically applied in
                                           ■ Fixed term                                smaller premises, and in larger agreements fixed terms are
                                           ■ Fixed + until further notice
                                           ■ Until further notice
                                                                                       more often used. Despite their flexibility, indefinite leases
                                                                                       often last for long periods.

                       24%                                                             When fixed terms are used, the contract periods are
                                                                                       typically quite short compared with many other countries.
                                                                                       In multi-tenant office buildings, a typical fixed term is from
                                              Source: KTI Rental database              three to five years.

                                                                                       For larger and purpose-built units, longer fixed-term
                                                                                       agreements are commonly applied. For a single-tenant
                                                                                       office building, a net lease of ten years or more is common.
diligence procedures. In single asset transactions, newly                              Agreements in large single-tenant buildings in, for example,
developed assets and transactions carried out between two                              sale-and-leaseback arrangements, often have lease terms of
domestic parties, the advisors’ role is typically more limited.                        up to 20 years.

The current market conditions have also brought about                                  Tenants’ rights are quite limited in the commercial property
new types of players in the market. In recent years, several                           market – for example, a tenant has no statutory right to a
new companies have been established, offering hands-on                                 lease renewal.
management services as well as sometimes acting as co-
investors. These companies mainly serve foreign investors                              Traditionally, rental agreements are for “gross rent”, which
but also work with domestic institutions that are willing to                           includes net rent plus a service charge covering typical
reorganize their property holdings.                                                    operating costs and minor repairs.1 Gross rents are very
                                                                                       common in multi-tenant buildings in all property types.
Market entry of international investors and domestic                                   Measured by number of agreements, some 85% of office
funds has brought about new approaches to due diligence                                agreements in the KTI rental database are for traditional
processes, with typically several types of experts – legal,                            gross rent.
technical, financial and tax advisors – working together.
This has resulted in an increased supply of these services                             In many cases in the remaining 15%, the landlord recharges
in the market.                                                                         the maintenance cost separately to the tenant. This both
                                                                                       encourages the tenants to save on costs and hedges the
Rental practices                                                                       landlord against the increases in operational costs.
Rental practices vary in the Finnish commercial property
market. The liberal legislation regulating leases gives parties
freedom to agree on terms and conditions.                                                           ”Gross rents are commonly
                                                                                                             applied”

                                                                                                                                                                       2 Institutional aspects of the Finnish property market
             ”Typical Finnish rental
          agreements provide flexibility                                               Separate recharging of maintenance costs is also very typical
                  for tenants”                                                         for shopping centres, where also a separate service charge for
                                                                                       marketing and other shared expenses is typically recharged
                                                                                       to tenants.
A common term in Finnish lease agreements is “until further
notice”: an indefinite contract is valid until either the tenant                       In single-tenant buildings, it is more common to apply net
or the landlord wishes to terminate it after an agreed notice                          rents, where the tenant is responsible for maintenance costs.
period, which is typically three, six or twelve months. These                          In net rents, the responsibility for taxes, insurances and
indefinite lease terms are especially popular in multi-tenant                          refurbishments can be agreed freely between the parties.
office buildings and smaller spaces. The landlord must,
however, have an acceptable cause to terminate the contract.                           Rents can be indexed freely in all indefinite leases and in
Rent adjustment, tenant mix changes, or rearrangement of                               fixed-period leases where the term exceeds three years. The
the property portfolio are among the conditions used to                                Consumer Price Index is the most commonly used index.
justify lease termination.



1 Gross rents are where the land rent, insurance, property taxes and operational expenses are paid by the owner. This means that management and maintenance
costs for both indoor and outdoor areas of the building are the owner’s responsibility. This is also the case with heating, water and waste disposal. With regards
to cleaning and electricity, the owner is typically responsible for the public areas of the building, and tenants have their own electricity and cleaning agreements
regarding the space they use. The owner is responsible for repair and replacement costs if caused by normal wear and tear.
                                                                                                                                                                       21
Types of lease agreements in shopping                                                          2.3 Planning
                                                         centres, share of lease agreements
                                                                                                                                                        Land use in Finland is regulated by the Land Use and Building
                                                                           3%
                                                                                                                                                        Act. The system has three levels of land use plans: a regional
                                                                                                                                                        land use plan, a local master plan and detailed local plans.
                                                                                                                                                        Further provisions and guidelines concerning building are
                                                                                          36%
                                                                                                    ■ Base rent                                         issued in the National Building Code of Finland, which was
                                                                                                    ■ Base rent + turnover-based share                  reformed as of beginning of 2018.
                                                                                                    ■ Only turnover-based rent

                                                                61%                                                                                     National principles for land use and regional structure are
                                                                                                                                                        defined by the Council of State. These national principles of
                                                                                                                                                        land use are reflected in the regional plans, which embrace
                                                                                                                                                        structural, functional and environmental considerations.
                                                                                                                                                        Regional plans are drawn up and approved by Regional
                                                                                                          Source: KTI Rental database
                                                                                                                                                        Councils.

                                                                                                                                                        Regional plans and steering of land use is one of the tasks
                                                         In shopping centres, the majority of rental agreements are                                     that will also be moved to the new 18 counties in 2021 if the
                                                         turnover-based. More than 50% of all shopping centre lease                                     legislation will be passed by the current Parliament. They
                                                         agreements in the KTI database consist of a minimum base                                       will take over the tasks of the current ELY centres (Centres
                                                         rent supplemented by an agreed share of turnover. However,                                     for Economic Development), which currently promote and
                                                         the turnover-based part of the rent is typically quite low,                                    steer planning and land use, as well as Regional Councils,
                                                         as the landlord wants to secure a stable base for their cash-                                  who are currently responsible for regional plans.
                                                         flow. In some 6% of all agreements the rent is solely based
                                                         on the tenant’s turnover.                                                                      The local master plan is an instrument for guiding and
                                                                                                                                                        coordinating land use at a general level. It is produced by
                                                                                                                                                        local authorities, but needs to follow the guidelines of the
                                                                        ”Shopping centre rents are                                                      regional plans. Detailed local plans are used to regulate
                                                                                                                                                        the building and formation of the physical townscape.
                                                                         typically turnover-based”                                                      In addition, every local authority has its own building
                                                                                                                                                        ordinance, the content of which is defined according to local
                                                         In shopping centres, fixed term contracts are commonly                                         needs. In the current act, local authorities have extensive
                                                         applied, especially in larger premises. Fixed term contracts                                   powers to make independent decisions in land use planning
                                                         represent some 75% of the number of agreements and 84%                                         matters.
                                                         of the total retail space in the KTI database.
                                                                                                                                                        The Land Use and Building Act obligates municipalities to
                                                         In over-supply situations, various means to attract and                                        adopt an open and interactive approach to planning. The
                                                         retain tenants can be applied. For instance, landlords may                                     local planning process is aimed at facilitating the involvement
                                                         offer rent-free periods, stepped rent increases and tenant                                     of all those concerned in planning: landowners, residents
                                                         improvements for new tenants, among other things. This was                                     and businesses in the area.
                                                         clearly seen, for instance, in the Helsinki metropolitan area
                                                         office markets during the sluggish economic development.                                       Building permits are approved by municipalities. A building
                                                         However, the impact of these terms on the overall rental                                       permit may be granted if the plan allows the type and size of
                                                         levels and markets is very difficult to capture in statistics.                                 building that is being applied for. Special permits to exceed
2 Institutional aspects of the Finnish property market




                                                         Typical leasing practices in Finland
                                                         Sector                         Shopping            High street               Super-               Offices,              Offices,          Industrial,           Residential
                                                                                         centres                 shops               markets           multi-tenant        single-tenant             logistics

                                                         Lease term 5-15                                    3-10 / until 10-15                            3-5 / until 10-20 5-15                                                Until
                                                         		                                               further notice		                            further notice			                                                further notice
                                                         Basis for rent             Space area /             Space area           Space area             Space area           Space area           Space area             Space area
                                                                                        turnover
                                                         Rental payments                  Monthly                Monthly              Monthly                Monthly              Monthly              Monthly                Monthly
                                                         Indexation                  Cost of living        Cost of living       Cost of living         Cost of living        Cost of living      Cost of living         Cost of living
                                                         Rent review                      Annually              Annually             Annually               Annually              Annually            Annually               Annually
                                                         Internal repairs                 Tenant / Tenant Tenant Tenant /                                                           Tenant              Tenant               Landlord
                                                                                          landlord			landlord
                                                         External repairs                Landlord               Landlord               Tenant               Landlord                Tenant              Tenant               Landlord
                                                         Building insurance              Landlord               Landlord               Tenant               Landlord                Tenant              Tenant               Landlord
                                                         Property taxes                  Landlord               Landlord               Tenant               Landlord                Tenant              Tenant               Landlord

                                                         The cost-of-living index 1951:10 = 100 is a long time series calculated from the latest consumer price index (currently consumer price index 2000 = 100) and its
                                                         development, therefore, follows the consumer price index. Many rents, such as those on dwellings, business premises or land, are usually tied to the cost-of-living index.
                                                         From the user’s point, the cost-of-living index is the most usable one, because index revisions do not interrupt the series and the point figures of the cost-of-living index are
                                                         published monthly at the same time as the consumer price index. (Statistics Finland)
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